U.S. private job gains in June largest in 1-1/2 years

A worker builds an engine for the Boeing 737-900 at their assembly operations in Renton, Washington, October 18, 2012.

Reuters/Andy Clark

WASHINGTON (Reuters) - U.S. private-sector hiring hit a 1-1/2-year high in June, reinforcing views that momentum was building to carry the economy through the rest of the year after a dismal start.

Wednesday's report from payrolls processor ADP added to other bullish data ranging from manufacturing to auto sales that has suggested the economy has bounced back smartly after a first-quarter slump.

"This is further proof that recent weaker growth numbers are not a true reflection of the U.S. economy," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

Private employers added 281,000 workers to payrolls last month, up from 179,000 in May, ADP said. June's increase, which topped economists' expectations for a gain of only 200,000 jobs, was the largest since November 2012.

Coming a day before the government's comprehensive employment report for June, the ADP data increased the likelihood of another month of strong nonfarm payrolls growth, economists said.

Most, however, maintained their forecasts for the government data, noting that the ADP report, which is jointly developed with Moody's Analytics, was not a reliable indicator of overall jobs growth.

Payrolls probably increased by 212,000 in June after rising by 217,000 the prior month, according to a Reuters poll of economists. The Labor Department is schedule to release its jobs tally at 8:30 a.m. EDT (1230 GMT) on Thursday.

In a separate report, the National Federation of Independent Businesses said small business hiring increased in June for a ninth straight month, the longest string of gains since 2006.

FIRMS NOT PULLING BACK

"The ADP data, along with many other labor market indicators, suggest that firms have not pulled back on payrolls despite the weak growth during the first half of the year," said Daniel Silver, an economist at JPMorgan in New York.

Gross domestic product contracted at a 2.9 percent annual pace in the first quarter. Growth in the second quarter is forecast at around a 3.5 percent rate.

That better outlook was underscored by data on Tuesday showing sales of automobiles hit their highest level in almost eight years in June and factories expanded at a steady clip.

Even housing, which has struggled following a run-up in mortgage rates last year, is showing signs of life. But higher borrowing costs remain a constraint, with applications for loans to buy homes falling for a third straight week last week.

With the economy's fortunes improving, some economists said the U.S. Federal Reserve's ultra easy monetary policy was no longer warranted. The central bank is reducing the amount of money it is injecting into the economy, but has yet to signal an intention to raise interest rates anytime soon.

"This is a further warning sign that the Fed is falling behind in its guidance on the future path for interest rates," said John Ryding, chief economist at RDQ Economics in New York.

The Fed has held benchmark overnight rates near zero since late-2008.

U.S. stocks were flat after the data on Wednesday, while bond yields rose, with the 10-year Treasury note hitting 2.61 percent. The dollar firmed against a basket of currencies.

While a separate Commerce Department report showed orders received by factories fell in May on a sharp drop in bookings for defense goods, inventories recorded their biggest increase since October 2011, a boost to second-quarter growth.

Unfilled orders at factories also rose, as did shipments, brightening the outlook for manufacturing.

A slow pace of inventory accumulation was one of the main drags on growth in the first quarter.

Last month, job gains in the private sector were broad-based. Construction payrolls increased by 36,000, the biggest gain since February 2006. Manufacturing added 12,000 jobs.

Professional business services employers hired 77,000 workers last month, the most since November 2012.